Wall Street warns: Markets too optimistic on inflation, beware of "hawkish surprise" risk
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Wall Street warns: Markets too optimistic on inflation, beware of "hawkish surprise" risk
Deutsche Bank and JPMorgan warn that investors may be underestimating the persistence of inflation and the lagged impact of tariffs.
Navigating Web3 tides with focused insightsAuthor: Zhang Yaqi
Source: Wall Street Insights
As recent international trade tensions ease, financial markets' concerns about inflation have significantly cooled. However, the latest analyses from Deutsche Bank and JPMorgan warn that this optimism may be premature. Investors might be underestimating the multiple underlying upward pressures on prices, exposing themselves to the risk of a more hawkish-than-expected "hawkish surprise" from central banks, which could shock equity and bond markets.
According to Wind Trading Desk, in a report dated November 3, Deutsche Bank noted that benefiting from last week’s trade easing, U.S. one-year inflation swaps recorded their largest weekly decline since May. Meanwhile, gold prices—traditionally an inflation hedge—have also retreated from recent highs.
However, central bank officials remain cautious. The Federal Reserve sent hawkish signals following its meeting last week, with Chair Powell suggesting another rate cut in December is not guaranteed. This stance contrasts with market expectations for dovish action and adds uncertainty to future policy paths. JPMorgan emphasized in a report on October 31 that while the inflationary impact of tariffs is delayed, it will eventually materialize—and could prove more persistent than expected.
If inflation proves more resilient than anticipated, investors face multiple risks. First, a stronger-than-expected hawkish pivot by central banks could re-emerge, pressuring asset prices. Second, real assets such as gold—which perform well in inflationary environments—could regain favor. Third, historical experience shows that hawkish turns by central banks often coincide with stock market sell-offs, as seen in 2015–16, late 2018, and 2022.
Deutsche Bank: Six Factors Could Keep Inflation Persistently Above Expectations
Despite strong market optimism, Deutsche Bank argues there are several reasons to believe markets may again be underestimating inflation stickiness—a pattern repeatedly observed throughout the post-pandemic cycle. The report identifies six key factors:
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Demand-side pressures are significant: Recent global economic activity data have broadly exceeded expectations. The eurozone's October composite PMI hit a two-year high, U.S. PMI data remain robust, and the Atlanta Fed's GDPNow model forecasts annualized growth of 3.9% for Q3. Strong stock market gains have also generated a positive wealth effect.
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Lagged effects of monetary easing: The Federal Reserve has cumulatively cut rates by 150 basis points since September 2024, while the European Central Bank has cut 200 basis points from mid-2024 to mid-2025. Monetary policy typically takes over a year to fully transmit, meaning these accommodative measures will continue influencing the economy into 2026.
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Tariff impacts have yet to fully materialize: Although market turmoil peaked in April, many tariff measures only took effect in August. It takes months for these costs to fully pass through to consumers. Further tariff hikes remain possible.
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Fiscal stimulus in Europe is coming: Planned fiscal stimulus in Europe will add further demand pressure, while the eurozone unemployment rate is near historic lows and economic spare capacity is far below levels seen during the 2010s.
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Oil prices are rising again: New sanctions and OPEC+'s decision to pause output increases are pushing oil prices higher once more.
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Inflation remains persistently above target: Inflation rates in major economies continue to exceed central bank targets. U.S. September CPI was strong, with core CPI posting a 3-month annualized growth rate of 3.6%. Eurozone core inflation stood at 2.4%, above expectations and has remained above 2% since end-2021. Tokyo CPI for October in Japan also exceeded forecasts, and nationwide inflation in September remained at 2.9%, staying above the Bank of Japan's target since early 2022.
Tariff Pass-Through Is Delayed, But Inevitable
Among the various inflation drivers, the impact of tariffs deserves particular attention. JPMorgan’s research delves into this issue, arguing that although transmission is slower than expected, U.S. consumers will ultimately bear most of the tariff burden.
JPMorgan estimates that as of late October, tariff revenues this year were already over $140 billion higher than the same period last year, with a full-year increase likely reaching around $200 billion. Initially, U.S. firms absorbed part of these costs by squeezing profit margins, but surveys show companies now plan to pass on a larger share to consumers.
The bank forecasts U.S. core CPI inflation could peak in Q1 2026 at 4.6% (quarterly annualized rate). Tariffs are expected to cumulatively lift core CPI by approximately 1.3 percentage points by mid-next year.
The delay in tariff pass-through stems from phased implementation, importers using bonded warehouses to defer payments, time-consuming supply chain transmission, and some firms drawing down inventories to stabilize prices. However, businesses cannot indefinitely absorb margin compression. Surveys by the New York Fed, Atlanta Fed, and Richmond Fed all indicate firms plan to pass through 50% to 75% of tariff costs. JPMorgan warns that if firms lack pricing power and fail to pass on costs, they may instead cut investment and employment to manage expenses—an outcome that would significantly weigh on economic activity.
'Hawkish Surprise' Could Hit Stocks and Bonds; Real Assets Like Gold Would Regain Support
If the market misjudges inflation, investors face three main risks.
First is additional “hawkish surprises” from central banks. Deutsche Bank notes the Fed’s recent hawkish tilt as an example. Looking back at this cycle, investors have repeatedly been caught off guard by prematurely expecting rate cuts. The report also points out that since September 2024, the Fed has delivered the fastest pace of easing in non-recession periods since the 1980s, leaving limited room for further accommodation.
Second, higher-than-expected inflation would renew support for real assets like gold. The report argues that gold’s recent pullback coincided with fading inflation fears, and if inflation proves stickier than expected, this trend would reverse. Historically, real assets capable of preserving value tend to perform well during inflationary periods.
Finally, beyond being clearly negative for bonds, central bank “hawkish pivots” have historically often coincided with sharp equity market corrections. Citing data, the report notes that the Fed’s hawkish moves in 2015–2016 (first hike), late 2018 (consecutive hikes), and 2022 (aggressive hiking) all occurred alongside significant selloffs in the S&P 500. Historically, rate hikes are among the most common triggers for major U.S. equity downturns.
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